International Economic Conditions

Recent indicators for the global economy suggested that
activity in Australia's major trading partners
in the early part of 2014 had expanded at around its
average pace. Similarly, the growth in world trade volumes
over recent months had been at, or even a little above,
the average growth of the past few years.

In China, data for the first few months of 2014 had
suggested a continuation of the easing in economic growth
that had started in the latter part of 2013. While this
moderation was evident across a range of indicators,
members noted that the data for the early months of
the year were difficult to interpret given the Chinese
New Year holiday. In March, China's national legislature
set the target for GDP growth in 2014 at 7.5 per cent,
unchanged from 2013. Members noted that the authorities'
concerns about credit growth might constrain stimulus
measures in the event that some support for growth was
needed. The targets for inflation and money growth in
China were also unchanged for 2014.

Recent data for the United States were consistent with
further moderate growth in the economy, even though
adverse winter weather conditions had had a noticeable
temporary effect on activity in the March quarter in
at least some parts of the country. Indications were
that consumption and business investment had continued
to rise in recent months, and the increase in payrolls
employment in February was close to the average pace
over 2013.

In Japan, domestic demand growth had remained strong,
with activity picking up prior to the consumption tax
increase at the beginning of April. Inflation had fallen
back slightly as the effects of higher energy prices
following the depreciation of the yen had begun to diminish.
There had been small increases in base wages offered
by some large companies in recent negotiations, the
first increases for some time. In the rest of east Asia,
growth had continued at around the average of the past
decade, while economic conditions in India remained
subdued. In the euro area, GDP grew modestly in the
December quarter, the third consecutive quarter of positive
growth, and more recent indicators pointed to a further
expansion in the March quarter.

Global commodity prices had declined since the previous
Board meeting. The spot price for iron ore had been
volatile over recent weeks, while steel prices in China
had declined and spot prices for coking and thermal
coal were well below current contract levels. The fall
in the price of steel in China over recent weeks was
consistent with a softening in demand. At the same time,
the supply of steel appeared to have been constrained
by a tightening in credit conditions reflecting the
Chinese authorities' concerns about pollution.
Base metals prices had also declined, though rural commodity
prices were a little higher.

Domestic Economic Conditions

Members began their discussion of the domestic economy
with the labour market, which remained weak despite
a strong rise in employment in February and an upward
revision to employment in January. The unemployment
rate had remained at 6 per cent in February and the
participation rate had picked up. The ABS had cautioned
that part of the change in employment and participation
in the month had been attributable to larger-than-usual
sampling variability. Members noted that, while the
February data may have overstated the improvement in
the labour market, it was also possible that the earlier
data had overstated the weakness. Meanwhile, a range
of indicators of labour demand suggested a modest improvement
in prospects for employment, although the unemployment
rate was still expected to edge higher for a time.

The national accounts, which had been released the day
after the March Board meeting, reported that average
earnings growth over the year to the December quarter
2013 had remained subdued. With measured growth in labour
productivity around the average rate of the past two
decades, nominal unit labour costs were unchanged over
2013.

Members recalled that the national accounts reported
that GDP rose by 0.8 per cent in the December quarter
and by 2.8 per cent over the year, which was a little
stronger than had been expected. In the quarter, there
had been further strong growth of resource exports,
while growth in consumption and dwelling investment
picked up a little and business investment declined.
Public demand had made a surprisingly strong contribution
to growth, but planned fiscal consolidation at state
and federal levels was likely to weigh on public demand
for some time.

Members observed that more recent economic indicators
had generally been positive. Retail sales had increased
by 1.2 per cent in January, continuing the pick-up in
momentum that began in mid 2013. The Bank's liaison
with firms suggested that, more recently, retail sales
growth may have eased from this strong rate. Motor vehicle
sales declined further in February, as had measures
of consumer confidence over recent months, but the latter
were still around their long-run averages.

Housing market conditions remained strong, with housing
prices rising in March to be 10½ per cent higher over
the year on a nationwide basis. Members noted that dwelling
investment had increased moderately in the December
quarter, with a pick-up in renovation activity, and
that the high level of dwelling approvals in recent
months foreshadowed a strong expansion in dwelling investment.

Data on business conditions released during the month
had been somewhat mixed. Business investment fell in
the December quarter, driven by a large decline in machinery
and equipment investment and falls in engineering and
non-residential building construction. While much of
the decline appeared to have been driven by mining investment,
non-mining business investment was also estimated to
have declined in the quarter. More recently, non-residential
building approvals had increased in January and, in
trend terms, were at their highest level since 2008,
with increases evident across a range of categories,
including the office, industrial and ‘other commercial’
sectors. Some survey measures of business conditions
had declined in the month, but most measures were around,
or a bit above, average levels and also above levels
recorded in mid 2013. Business surveys and information
from the Bank's liaison suggested that businesses
were still somewhat reluctant to commit to major investments,
although the growth of business debt had picked up a
little.

Members discussed the industry composition of output,
investment and employment growth over the past two decades.
They noted that employment growth had been spread across
many industries, although the industries with the largest
contributions to employment growth – particularly service
industries – had not been the same industries with the
largest contributions to growth of output and investment.
Members noted that future employment growth was likely
to continue to be concentrated in service industries.
Data from the ABS capital expenditure survey indicated
that a number of non-mining industries were expecting
to increase their investment spending a little in the
following financial year.

Financial Markets

Members observed that financial markets had been relatively
quiet over March. The main focus had been the timing
of policy tightening by the US Federal Reserve and uncertainty
about the economic outlook in China.

The Federal Reserve further reduced its monthly rate
of asset purchases at its March meeting by US$10 billion,
as expected. At the same time, the Fed had revised its
forward guidance framework, removing any reference to
unemployment thresholds and instead indicating that
policy rates were anticipated to remain unchanged for
a ‘considerable time’ after the likely end
of asset purchases later this year, although Fed officials
also increased slightly their expectations for the future
path of the policy rate. The market consequently brought
forward its expectation of the first rate rise to the
middle of 2015.

Members noted that government bond yields in the major
markets of the United States, Germany and Japan were
little changed over the month, while those in euro area
periphery countries continued to decline significantly,
with yields on government bonds in Spain and Italy falling
to around their lowest levels since late 2005. Government
bond yields in emerging markets had generally declined,
with movements in yields dependent on perceptions about
prospects for individual economies.

In Australia, longer-term government bond yields were
little changed over the past month, with some rise at
shorter maturities. Members also noted that the Australian
Office of Financial Management had issued $7 billion
of a new April 2026 bond – the largest on record – with
very strong demand from both domestic and overseas investors.
The latest data on ownership of Australian debt showed
that foreign holdings of Commonwealth Government Securities
were around two-thirds of the total, compared with around
one-third for state government debt.

Credit markets were generally quiet over the month with
corporate bond issuance in developed markets continuing
at a similar pace to that in recent years, although
issuance in emerging markets had declined over the past
year, mainly reflecting less issuance by Chinese non-financial
corporations. Credit risk in the Chinese corporate bond
market had received more attention from investors and
commentators over the past month after authorities allowed
the first default in the onshore Chinese market to occur.
In Australia, corporate bond spreads remained around
their lowest levels since 2007/08 and issuance continued
to be easily absorbed by the market, including issuance
by lower-rated corporations and at longer maturities.

Global equity markets were little changed over the month,
and the Australian equity market moved broadly in line
with developments elsewhere. The experience across emerging
markets was mixed, with Russia showing a large fall
over the past month; however, equity markets in several
other emerging market economies had recovered some of
the losses that had occurred over the previous year.

Members observed that the major currencies had changed
little since the previous Board meeting. The renminbi
depreciated by 1 per cent against the US dollar, and
the People's Bank of China had widened the daily
trading band for the exchange rate from ±1 per cent
to ±2 per cent in order to encourage greater two-way
movement in the exchange rate. The Russian rouble had
appreciated over the month as the Russian central bank
continued to intervene on a relatively large scale in
the foreign exchange market.

The Australian dollar had appreciated, partly in response
to domestic economic data, and it was now close to the
level in November 2013, although on a trade-weighted
basis the exchange rate was still about 12 per
cent below its peak a year earlier. Members noted that
the New Zealand dollar was currently at levels equivalent
to historical peaks against the Australian dollar, following
the tightening of monetary policy by the Reserve Bank
of New Zealand.

Members completed their discussion of financial markets
by noting that money market rates in Australia continued
to imply that the cash rate was expected to remain unchanged
over the remainder of the year.

Considerations for Monetary Policy

Overall, growth in Australia's major trading partners
looked to have remained around average in the early
months of 2014, although there were signs that growth
in China had eased. Domestically, growth over 2013 had
been below trend pace. Members noted that while falling
mining investment and weak public demand were set to
constrain growth for some time, there were early promising
signs in other parts of the economy. In particular,
a strong pick-up in dwelling investment was in prospect
and there was some evidence that consumer demand had
strengthened a little. Indicators for exports remained
strong, while those for business conditions were generally
higher than they had been in 2013. However, many businesses
appeared to be waiting for an increase in current demand
to occur before they were willing to increase investment
spending.

Information on wages pointed to moderate growth, which
was expected to help contain domestic inflationary pressures.
While there had been some tentative evidence of a slight
improvement in a number of labour market indicators,
conditions would need to improve further before the
unemployment rate could be expected to decline.

At recent meetings, the Board had judged that it was
prudent to leave the cash rate unchanged and members
noted that the cash rate could remain at its current
level for some time if the economy was to evolve broadly
as expected. Developments over the past month had not
changed that assessment. There had been further signs
that low interest rates were supporting domestic activity.
Members noted that the exchange rate remained high by
historical standards. Despite commodity prices falling
further over the past month, the exchange rate had appreciated
a little further. While the decline in the exchange
rate from its highs a year earlier would assist in achieving
balanced growth in the economy, this would be less so
than previously expected given the rise in the exchange
rate over the past few months.

On the basis of this assessment, the Board's judgement
was that monetary policy was appropriately configured
to foster sustainable growth in demand and inflation
outcomes consistent with the 2–3 per cent inflation
target. The Board would continue to monitor developments
in the economy, with members noting that, on present
indications, the most prudent course was likely to be
a period of stability in interest rates.